President Obama’s address to the joint session of Congress is less than 24 hours old, and the Dow Jones Industrial average is currently down more than 1%. But according to the prediction markets, people are generally optimistic that the Dow will recover some of its recent losses -- and soon.
Prediction markets are speculative markets created for the purpose of making predictions about future events. And they are so powerful because they are often accurate. In his book The Wisdom of Crowds, James Surowiecki describes this phenomenon:
"Under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them. Groups do not need to be dominated by exceptionally intelligent people in order to be smart. Even if most of the people within the group are not especially well-informed or rational, it can still reach a collectively wise decision."
While the market is down today, prediction market users seem to think that the Dow Jones will rise, and soon. The community is currently betting favorably in The Industry Standard’s prediction "Dow Jones rises to 8000 by March 20, 2009? The current consensus stands at 65%.
The Standard community is also betting against the negative Dow Jones prediction "Dow Jones falls below 6500 by March 9, 2009? For that prediction, community consensus stands at a mere 27%.
A quick look at some other prediction markets give us some additional insight into the crowd. The Predicitify market "What will the Dow close on at the end of President-elect Obama's first 100 days in office?" (April 30, 2009) shows that out of 151 predictions, 76% of the community is betting that the Dow will close somewhere over 8,000.
The HubDub prediction "Dow -- Up or down before April 1? Which comes first, 7000 or 8000?" is less positive, however. Out of 789 predictions, 70% think that the Dow will close below 7000 first, while only 24% predict that the Dow will close above 8000 first.
Are you bullish or bearish when it comes to predicting the direction of the Dow? Comment below, or place prediction market bets on the index reaching 8000 by March 20 or falling below 6500 by March 9.
Melissa Chang (@mchang16) is the president of Pure Incubation, and her blog can be found at www.16thletter.com. Chang writes about The Industry Standard Prediction Market as part of an ongoing series. She’s betting that the Dow’s going to rise above 8000 by the first day of spring.
Although many feel that seeing the Dow come back up to 8000 is very possible, and perhaps their hopeful spirit has influenced their belief, a large number are also not certain that we've seen the bottom yet. Throughout the past several months many have thought that surely the DJIA can't drop any lower, only to see it do just that. So to them, the possibility of seeing it below 7000 isn't unreasonable. But they do have the belief that even if that occurs, good days (or at least better ones) are ahead of us.
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